It would be wonderful if the Bank of England was the only global financial centre to show signs of tightening credit conditions. Unfortunately that is not the case. In fact, I am going to show you that the chart below is being reported around the globe as a potential sign of a BoE tightening credit conditions.
The Bank of England is, first and foremost, a central bank and it doesn’t operate by the same rules as the markets in its home country of England. It does have rules in place to ensure that the banks in England don’t create too much credit and then blow it all up in the one fell swoop when they go into trouble. We are all being treated to the negative news about these banks in England because the Governor of the Bank of England himself admitted the truth.
So, when the Bank of England loosens credit conditions across the world there will be many people who will say, “The Bank of England has done this.” That’s really silly. The reality is that you cannot just allow a central bank to do what they want.
The banks in the UK are unable to move money around the world because they are not allowed to by the Bank of England. The Bank of England is actually a government institution. It was given the power to regulate and supervise the banks by the Home Office in London.
You see, when a central bank gets involved in things like credit and lending it can’t create the money out of thin air like the Fed. That’s what their power is based on. And the Bank of England will now try to move money around the world.
As I pointed out before, a central bank cannot lend you money to buy bonds because that would put them in danger of defaulting on the loan. The Treasury does that for them but they don’t do it all the time. A central bank cannot just make the markets go away and then come in and cause the markets to collapse.
When a central bank does that they start the process of inflation. And the one thing a central bank cannot do is cause inflation. They are not allowed to do that.
It would also be wrong to say that a central bank will help the banking system that it is part of. Why? Because banks use their capital to lend you money to buy bonds from you. They are lenders and therefore they can never lend more than they have.
If the central bank were to try to make the markets go away and then start causing inflation then that would be illegal. Why?
Because the European Union is responsible for the financial market in Europe. They determine what is legally allowable and what is not. And that’s why they decided that the BoE shouldn’t do what they are doing right now.
However, when it comes to the US it seems that what happens in the UK affects the credit conditions in the US. So, it makes sense that the BoE is trying to make the economy stronger in the US. Unfortunately, that will be harder to do because their leverage is lower, their interest rates are higher and they have less capital.
Hopefully, they will learn their lesson and they will not do what they are doing in the future because that will only result in higher inflation and even more problems than we already have. at this time.